RISK MANAGEMENT

All too often, whether a nonprofit corporation is legally compliant in its operations receives attention only after a conflict or issue arises. Instead, a nonprofit corporation can better prevent such conflicts and protect itself through regular legal audits of its corporate governance, federal and state tax exemption, other federal tax law matters, employment and volunteer issues, intellectual property, and facilities. Financial audits alone, while important, will not sufficiently account for the larger issue of overall compliance with federal, state, and local laws.

A legal audit will include a wide range of information-gathering and reviewing. In auditing the following areas, questions should look both backward (i.e., have we done what is required?) and forward (i.e., what else can we do?). Nonprofit should keep accurate and organized files so that various organizational documents and financial statements are up to date and easy to access.

The following areas and documents should be reviewed for compliance when conducting a legal audit:

Corporate Governance

Articles of Incorporation (and any amendments)

Bylaws (and any amendments)

A list of current board members, officers, and (if applicable) members

Meeting minutes (board, membership, annual, special, committee, etc.)

Copies of governance-related policies (e.g., conflict of interest policy for directors and officers)

Copies of financial statements and budgets

Copies of any contracts for services to be rendered or received

Copies of any leases and subleases for real or personal properties

Copies of insurance policies

Questions to Consider:

Do the Articles and Bylaws correctly describe the nonprofit corporation as it operates today? Do the Articles and Bylaws comply with applicable tax and corporate laws?

Do the Articles and Bylaws state the same or similar purpose statements that are consistent with each other?

Have all board resolutions been properly taken and documented?

Have all elections been properly held and documented?

Have governance policies been reviewed for consistency with practice?

Have any officers or directors disclosed a conflict of interest, and if so, was it properly recorded and voted upon, in accordance with the corporation’s conflict of interest policy and applicable laws?

Does the corporation have directors and officers (D&O) insurance? What types of acts and omissions are covered and not covered?

Does the corporation have commercial general liability insurance? What types of acts and omissions are covered and not covered?

Federal Exemption Filings

Application for 501(c)(3) tax-exempt status (IRS Form 1023)

IRS determination letter granting 501(c)(3) tax-exempt status

Copies of IRS Form 990 (for at least three years)

Copies of any communications with the IRS

Questions to Consider:

Are the nonprofit corporation’s Form 1023 and past three filings of Form 990 available for inspection at the principal location?

Has the purpose or activities of the corporation changed significantly since applying for tax-exempt status? Have such changes been reported to the IRS?

Do the directors and officers of the nonprofit corporation understand the restrictions under 501(c)(3)?

Is the corporation engaged in any unrelated business activities? If it is, are such activities substantial in relation to the corporation’s overall activities and is the corporation paying unrelated business income tax and filing IRS Form 990-T, as required?

If the nonprofit corporation is engaged in international grantmaking, does it use expenditure responsibility or properly vet the grantees with an equivalency determination (required for a private foundation, generally recommended for a public charity)?

Is the nonprofit continuing to meet certain critical financial ratios (e.g., solvency, public support test)?

A list of jurisdictions in which the corporation conducts business, solicits funds, etc.

Records of gross receipts from sales and total purchase prices of all tangible personal property purchased for sale or consumption for sales and use tax purposes (if applicable)

Seller’s permit, if such is required for a retailer of tangible personal property subject to sales tax

Questions to Consider:

Is the nonprofit corporation registered and current with applicable state agencies? In California, this includes the Secretary of State, Attorney General, and Franchise Tax Board.

Is the corporation in compliance with charitable solicitation laws and registrations in all jurisdictions in which it solicits funds?

Has the corporation determined whether its purchases are subject to tax or whether it should collect taxes on its sales? Unlike many other states, California does not provide a blanket exemption from its sales and use taxes to charitable organizations.

Has the corporation reviewed the overall compensation to any employee to ensure that it is reasonable? For executives, was the compensation package approved in advance by an independent body, who reviewed appropriate comparability data and concurrently documented its decision? SeeExecutive Compensation – The Legal Issues

Does the corporation have an orientation process for board members? Do board members understand their fiduciary duties?

Does the corporation properly screen prospective employees and volunteers, including background checks when appropriate?

Are the volunteer and participant releases and waivers used consistently? Do they adequately protect the corporation from liability?

What are the nonprofit corporation’s risks of infringement of the intellectual property rights of other parties?

How does the corporation protect its own intellectual property?

Is the corporation complying with any provisions in third party agreements regarding non-disclosure of confidential information?

Is the information on the corporation’s website up-to-date and accurate and does the corporation have the requisite authority to publish all of the content (including photos and videos) on its website?

Facilities

Copies of the lease agreement(s) and any subleases to tenants

Copies of any original applications for property tax exemption and copies of annual assessor filing requirements (where applicable) (e.g., Board of Equalization and County Assessor)

Copies of insurance policies

Copies of any zoning ordinances or regulations that affect the corporation’s location

Questions to Consider:

Is the nonprofit corporation complying with the terms of its lease agreement? Is the corporation subleasing to other tenants? Is that sublease permitted under the master lease?

Does the corporation have sufficient insurance related to its properties and facilities?

Is the corporation in compliance with various workplace laws applicable to it (e.g., OSHA, ADA)?

Local Issues

Copies of any city and county registrations

Copies of lobbying registrations and periodic reports (if applicable)

Copies of property tax reporting/payments (if applicable)

While the beginning steps of a legal audit can seem overwhelming, that should not be a reason to avoid it. The benefits of a legal audit are two-fold—not only does it bring a sense of reassurance but it may also help a nonprofit corporation determine whether its current way of conducting business “makes sense.” In turn, a nonprofit corporation can reform or correct past practices—improving record keeping procedures, restating a patchwork of Bylaws or Articles amendments into one clean document, instituting a new filing system, and the like—to help facilitate rather than hinder the ability to undergo a legal audit in the future.

UPDATE: If you missed us live, you can listen to the taped podcast here or on iTunes.

Red Flag Story: see if you can spot the potential problems …

Sara was on her way to a nonprofit board meeting when she ran out of gas on a dimly lit road. She was still 10 miles away from her destination without a building in sight. And she forgot her phone at home. The meeting would be starting in an hour and there appeared no way for her to make it in time.

Steadying her breath, Sara assessed the situation. It would be foolish to walk. But there were no other cars on the road, and she really had to get to that meeting.

The board was going to vote on a proposed contract with Sara to provide management services, as an independent contractor, operating the nonprofit’s newly launched social enterprise program, a bar whose profits would be used to fund the nonprofit’s charitable programs. A few days earlier, the board appeared to be split on the decision. Those in favor of the deal cited Sara’s experience and social network. Those against the deal cited the conflict of interest because of Sara’s position as a board member. With the other board members divided 50:50 on approval of the contract, Sara’s would be the determining vote.

Sara’s proposal involved her working full-time as manager of the new bar. She would be paid $10,000 per month, which was comparable to her pay as manager of one of the swankiest hotel bars in the city. In return, she would offer her services and provide to the organization the hotel bar’s contact list, which the nonprofit could use to solicit business.

As the meeting time approached, Sara powered on her laptop hoping for a wifi signal. Surprisingly, she found one, allowing her to send an email to the board chair stating that she was voting in favor of the contract.

Shortly after the meeting was over, Sara was informed by reply email that the contract was approved with 4 votes in favor (including Sara’s) and 3 against, with 3 absentee directors not voting. The next day, Sara rewarded herself with a new car.

The popularity of nonprofit crowdfunding is undeniable. Last year alone, it is estimated that $5 billion was raised through global crowdfunding with about 30 percent of that total going to social causes. While that figure pales in comparison to the approximately $300 billion raised by charities in the US over the same time period, the number of donation and reward-based crowdfunding has increased by more than 85 percent worldwide in 2012 over the previous year. And it is expected to continue to grow.

With all of the excitement around nonprofit crowdfunding, it is easy to overlook some of the potential risks to this fundraising model.

Charitable Solicitation Registration

Fundraising on popular crowdfunding platforms, such as Indiegogo and GoFundMe, allows nonprofits to broaden their support base. An organization can be operating in San Francisco, and receive funds from an individual in New York City as a result of its crowdfunding campaign. This type of fundraising allows an organization to gain national exposure with very little upfront capital. However, it also potentially exposes the organization to the jurisdiction of every state where it is deemed to engage in charitable solicitation based on its crowdfunding efforts.

Currently, thirty-nine states and the District of Columbia have laws governing charitable solicitation. Each state has its own unique laws and regulations regarding what qualifies as solicitation as well as the when registration is required. For example, California law defines “solicitation for charitable purposes,” as any request, plea, entreaty, demand or invitation to give money or property in connection with an appeal for charitable purposes or in which the name of the nonprofit is used as an inducement for making a gift or in which any statement is made that the gift will be used for charitable purposes. Under New York law, “solicit” includes a direct or indirect request for a contribution, whether expressed or implied, through any medium. A strict reading of most state laws regarding charitable solicitations within a particular jurisdiction would likely require a nonprofit to register.

Most states require registration by an organization before making any charitable solicitation within the state. California, however, does not require registration until an organization receives funds or property for charitable purposes and then, it must register within 30 days of receiving the qualifying charitable assets.

The failure to register can result in both civil and criminal penalties and vary among the states. Potential penalties include state fines, requiring the nonprofit to return all solicited funds or ordering the nonprofit to cease soliciting donations within the state until registration is completed.

As you can see, there are distinctions to each state’s charitable solicitation laws. It could be quite burdensome for a small nonprofit to comply with the charitable solicitation laws of all of the applicable jurisdictions, but the penalties for failing to comply can be costly. In addition, the IRS now requires nonprofits to provide information about their state registrations on their Form 990, the annual reporting return that certain federally tax-exempt organizations must file with the IRS. If a nonprofit files an incomplete or inaccurate Form 990, the IRS can impose harsh financial penalties.

There has been some debate as to whether internet activity, such as fundraising on crowdfunding platforms, triggers state solicitation registration requirements. Some guidance is provided under the Charleston Principles, nonbinding principles drafted by the National Association of State Charity Officials (NASCO) in 2001.

Under the Charleston Principles, a nonprofit would be required to register for online charitable solicitations if the nonprofit solicits donations through an “interactive website”; and the nonprofit either: (i) “specifically targets persons” located in the subject state for solicitation; or (ii) receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website.

Even if a nonprofit could argue that it did not solicit charitable funds within a state through its crowdfunding campaign, the follow up communication from the nonprofit to the donor, whether it be by email or letter (including the letter verifying the tax deductible donation) would be considered to target a resident of that state and would trigger the registration requirement.

Commercial Fundraisers

Under California law, a commercial fundraiser is a person or corporation paid by a nonprofit to raise money on the nonprofit’s behalf. The nonprofit pays the for-profit business either a flat fee or a percentage of the donations collected in the nonprofit’s name. A commercial fundraiser must register with the Attorney General’s Registry of Charitable Trust before soliciting charitable funds.

In my previous post, Crowdfunding Platforms & Commercial Fundraisers, I wrote that many of the well-known crowdfunding sites, such as Indiegogo and GoFundMe, do not appear to meet the California definition of a commercial fundraiser as they do not actively solicit funds on behalf of nonprofits, nor do they on their own, or through a compensated person, actually receive or controls the funds solicited by individuals or organizations for charitable purposes. However, with the large number of crowdfunding platforms in existence, a nonprofit may unwittingly campaign on a platform that falls within the definition of a regulated commercial fundraiser because it receives or controls the funds raised.

A commercial fundraiser typically has several of its own registration and reporting requirements. In addition, it may be required to enter into a written contract for each solicitation campaign, event, or service. A nonprofit may not be permitted to contract with any unregistered commercial fundraiser to solicit for charitable purposes and will be required to exercise oversight over the campaigns operated on its behalf. The Attorney General has the discretion to impose fines and other penalties, including civil and criminal actions, on nonprofits and unregistered commercial fundraisers who do not comply with the law.

Fraud and Misrepresentation

Nonprofits and commercial fundraisers are prohibited from misrepresenting the purpose of the charitable organization or the nature or purpose or beneficiary of a solicitation. Misrepresentation may be established by word, by conduct, or by failure to disclose a material fact. They are also prohibited from engaging in fraud or using any deceptive practice that creates a likelihood of confusion or misunderstanding.

The attorney general can file a lawsuit against a nonprofit or a commercial fundraiser who engage in misrepresentations or fraud while soliciting for charitable purposes. Earlier this year, Washington State Attorney General Bob Ferguson filed the first consumer action lawsuit over a project by an individual who failed to deliver a promised horror-themed decks of cards to individuals who crowdfunded his project on Kickstarter. Although this lawsuit was not against a nonprofit or commercial fundraiser, it does show that state lawmakers are paying attention to crowdfunding activities and are willing to bring suit against defrauders.

Nonprofits also should be aware that unscrupulous individuals may engage in unauthorized or fraudulent crowdfunding campaigns using the nonprofit’s name. To avoid fraud and misrepresentations, organizations should provide clear guidelines for crowdfunding as part of their overall gift acceptance policy. They should also provide individual supporters with clear messaging guidelines and ensure that these guidelines are followed. Many of these sites, including Indiegogo, allow for a “Verified Nonprofit Campaign,” badge to be placed on the campaign page to certify to contributors that funds will go directly to a verified nonprofit. Again, not all crowdfunding platforms will offer such a service, and therefore, it is important for organizations to provide individual supporters with clear guidance for campaigning on their behalf.

Crowdfunding can be a wonderful tool and resource for nonprofits to raise funds, but nonprofit leaders should be aware of potential associated legal risks and be prepared to comply with the laws of several jurisdictions.

Following up on our earlier post on fraud in the nonprofit sector, here are some tips for preventing fraud and the diversion of charitable assets:

Create a Strong Policy Against Fraud: Organizations should create comprehensive and forceful policies that go beyond the words on paper. The policies should incorporate reporting mechanisms and real consequences for violations. The policy should also be tailored to the specific nonprofit, explained in detail to all employees when training, and revisited yearly for effectiveness. Additionally, the board of directors must ensure that fraud reports are taken seriously, and that outside legal counsel is brought in when appropriate.

Implement a Culture of Honesty and Ethics: In addition to an anti-fraud policy, organizations should prepare a code of conduct that incorporates a zero tolerance for unethical behavior by volunteers, employees, officers, and directors. This code should be trained, exhibited, and reinforced within every aspect of the organization, especially at the top in order to set the example.

Encourage Whistleblowing: Employees are unlikely to report theft or mismanagement if they believe that their jobs are in jeopardy. Implementing anti-retaliation protections and providing a fraud hotline for anonymous reporting may provide confidence to employees exposing abuse.

Conduct Internal and External Audits: Every effective policy requires oversight. The board of directors should establish an audit committee responsible for reviewing the organization’s financials, as well monitoring the anti-fraud policies. One suggestion for the audit committee is to conduct surprise or unplanned audits. In addition to supervision by the nonprofit’s management and board of directors, nonprofits may also engage in regular external audits by hiring a CPA or an attorney.

Check Backgrounds: Consider conducting background checks on new employees or volunteer leaders. Pre-screening potential employees may be helpful in assessing whether the candidate has a criminal record, prior history of fraud, or heavy debts that may make fraudulent activity a bit more likely.

Separate Cash Handling Duties: Ensure that no single employee is responsible for handling cash, issuing checks, or reconciling financials. Instead, require two signatures on checks and have at least two individuals count money and verify receipts.

Prepare Responses: Organizations should contemplate the consequences for and responses to fraudulent activities. This includes responding to small mistakes or grave deceptions, both privately within the organization and publicly to the community.

Stay turned for our next post on fraud, which will focus on what to do if your organization is victimized by fraud.

Leaders of bar associations need to be particularly attentive to risks related to the governance and operations of their organizations and how to identify and mitigate such risks. This program will explore some of the most common and noteworthy risks, including those related to board oversight, delegation of authority, conflicts of interest, contracts, employees, social media and fraud. Sound policies and plans and heightened attention to risk management will allow bar associations to better advance their missions, and bar leaders to better fulfill their roles.

Some issues I’ll address with bar association leaders:

How do you and your board establish the tone at the top?

Are you delegating responsibilities and authority with due care and oversight?

Do you have, implement and enforce policies regarding signing contracts and checks?

How do you mitigate risks of employee-related liability?

Are you aware of the risks of fraud and your organization’s weaknesses in preventing fraud?

Do your policies regarding social media use reflect thoughtfulness and care in utilizing this powerful and increasingly important vehicle?

Did you know you could have antitrust risks related to price-fixing or boycotting?

What’s UBIT and why is that important?

How much overlap can we have between our 501(c)(6) bar association and 501(c)(3) affiliated foundation?

My presentation materials are available online on the ABA website here.

I’ll be on Tony Martignetti Nonprofit Radio on Friday, March 7, 2014, talking with Tony about fraud and what nonprofits should do to prevent and possibly report fraud. Listen in live here or catch us on iTunes.

A nonprofit victimized by fraud can find itself doubly harmed by (1) the direct loss resulting from the fraud and (2) news reports that characterize the nonprofit as untrustworthy or its leaders as culpable. It should be no surprise that the media loves to expose and publish stories about fraudulent activities in trusted organizations. And unfortunately, those stories often infer that the sector as a whole is plagued by fraud and widespread diversions of charitable assets.

A Washington Post analysis of filings from 2008 to 2012 found that [the American Legacy Foundation] is one of more than 1,000 nonprofit organizations that checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds. …

The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by The Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars. …

The Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened — even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost. …

The findings are striking because organizations are required to report only diversions of more than $250,000 or those identified as having exceeded 5 percent of an organization’s annual gross receipts or total assets.

And here are some of the criticisms of the article:

In The Washington Post story, the reporters had access to more than a million tax forms nonprofits filed over four years. They found that 1,000 nonprofits checked yes in response to a question on those returns about whether their group had suffered a “diversion of assets.”

Using that tiny percentage, the article then gave the misimpression that the nonprofit world is rife with “financial skullduggery,” when in fact it was the approximately 1,000 nonprofits themselves that were the victims of scams by for-profit vendors, employee theft, and outside investment advisers.

[T]he lure [of the Washington Post’s headline] implies that the nonprofits are involved in and parties to these “thefts, scams and phantom purchases,” as opposed to victims of people inside or outside of the organizations who were quite intent on plundering charitable resources. It looks to the Nonprofit Quarterly that the diversions reported in the article are nonprofits that had been cheated by employees, vendors, and outside financial advisors, but not engaged in trying to cheat donors or the public. …

A common problem in the press is the lumping of all 501(c) organizations into a broad “nonprofit” category, as though the problems or issues the press might find are problems of public charities. The Washington Post list combines all kinds of groups, many of which are not 501(c)(3) public charities. A striking number of the groups in the Washington Post spreadsheet were labor unions (501(c)(5) organizations) and fraternal organizations (501(c)(10) organizations).

Personally, I believe that charitable nonprofits are not plagued by fraud any worse than the for-profit sector. And the public’s higher trust in the nonprofit sector than in the public or for-profit sectors is well placed. But that is not to say at all that charities are excused from taking reasonable steps to prevent losses from fraud, properly report any diversions of assets, and/or obtain restitution.

In an opinion piece for The Chronicle of Philanthropy, Pablo Eisenberg responded to the critics of the Washington Post piece by stating:

What the critics seem to have forgotten is that nonprofit boards and executive directors have responsibility for the activities of their organizations, including the actions of their employees and investment advisers. We should expect leaders at nonprofits nationwide to be tightening their oversight to assure no unscrupulous activity is occurring. Donors should be demanding nothing less: It is their money that has been diverted in most cases, and when it isn’t, it’ s their tax money that went first to nonprofits and then to con artists.

Stay tuned for tips about addressing the risks and occurrences of fraud after the show.

Nonprofit organizations provide critical services, but often do so with limited resources and little time to assess legal risks and obligations. Nonprofit executive must balance their day with managing a board of directors and overseeing staff and volunteers. This workshop will provide an overview of key issues in people management, board governance, UBIT and other timely nonprofit issues. Come hear from seasoned professionals on best practices and areas of risk for our organization.

Too often I hear that an uninformed employer is hiring independent contractors instead of employees because it can’t afford employees. Yet, the hired workers are working full-time, indefinitely, and exclusively for the employer; they are managed on what must be done and how to do it; and they work without negotiated written contracts. In other words, they are legally employees, and the employer may be fined for failing to withhold employment taxes, breaching wage and hour laws (e.g., minimum wage, overtime, breaks), and failing to implement and/or enforce anti-discrimination and retaliation laws that may apply only to employees. In addition, the employer may find themselves unprotected by what might be very expensive workers’ compensation claims. See New Crackdown on Using Independent Contractors (and the Ten Consequences of Reclassifying Independent Contractors as Employees hyperlink within the article) by Robert W. Wood (Forbes).

Organizations that may have gotten the classification wrong in the past but want to correctly classify certain independent contractors as employees going forward may be eligible to do so through the IRS Voluntary Classification Settlement Program. Forbes provides a summary of the program in this article about the amnesty program available through June 30, 2013.

At first blush, it might seem simple to distinguish between a volunteer and an employee. But such distinction gets much more difficult to make when an organization pays a “stipend” to the volunteer. If the stipend is compensation for services, the paid individual may not be a volunteer and, if the payment is for regularly rendered services, may be an employee. Improper classification can raise many of the same issues described above for improperly classifying an employee as an independent contractor.

It is possible that the payment of a stipend to a volunteer may not convert the volunteer to an employee if the stipend is considered a reimbursement of certain types of expenses, a de minimis fringe benefit, or a nominal fee for service. Note that a Wage and Hour Opinion Letter (FLSA2006-28) expressed that the Department of Labor will presume that a fee paid to a volunteer is nominal as long as the fee does not exceed twenty percent of what an organization would otherwise pay to hire a full-time employee for the same services. However, organizations paying stipends to volunteers should confer with an employment/tax attorney for counsel regarding these issues.

A person receiving payment from a nonprofit may also fall under the classification of intern. Interns are also not employees and not subject to minimum wage and overtime laws under the FLSA if they meet the 6-factor test. See Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act and Legalities of Nonprofit Internships (Blue Avocado), which discusses the practical difficulties of meeting factor 4 (“The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded”). Under the FLSA, a person working in a part of the nonprofit that is considered a commercial (unrelated business) activity will not be recognized as a volunteer.

Employee or Volunteer: What’s the Difference? (Nonprofit Risk Management Center) – includes a discussion of the issues created by having an employee also volunteer for his or her employer. Note that if the employee ever says he or she was coerced to volunteer (a possibly very significant risk if the employee is ever terminated or disgruntled), the organization may face serious legal troubles.

Everyone loves a good scandal. That's why they fill our newspapers, television programs, and popular websites. But scandals in the nonprofit sector result in diminished or discontinued services, laid off employees, penalties imposed on responsible persons, publicly embarassed board members, and the death of organizations. They also result in a loss of public trust and can lead to substantial changes in the law.

On April 2, 2013, I had the great pleasure of presenting as the keynote speaker for an Association of Donor Relations Professionals Regional Workshop. The topic: What You Can Learn From Recent Nonprofit Scandals.

Start a business, any business. And act quickly! Get on the social enterprise bandwagon. You can’t rely just on fundraising anymore.

Invest in pet projects of your key leaders and split the profits with them.

Sell all kinds of merchandise with your name and logo if you can’t think of anything else. That always works.

Come up with cool things to sell to millennials and focus all your marketing efforts on reaching them.

Remember you’ll always have a competitive advantage in any business over a for-profit business because, as a nonprofit, you’re more trustworthy and you’re tax-exempt. UBIT? Nonsense. Nobody pays that.

Go big or go home; invest whatever you can in the new business venture even if you have to deplete your reserves. You can’t win if you don’t play the game. But see #7 and #8 for places where you can save.

Keep the staffing costs down by using your existing staff to run the new venture. No matter how busy they are, they’ll learn to manage. They always do.

Keep professional fees low by using self-help books, volunteers, and, if you have to use professionals, the most inexpensive professionals you can find (they're all the same).

Have your executive director make it his or her priority to get the new venture off the ground. Use revenues-based bonuses to get your E.D. motivated.

Look for partnerships with any for-profits that will donate a part of its sales to your organization in exchange for some publicity. That's just free money.

Editor's Disclaimer: At the risk of offending Screwtape, always consider the source of any tips before relying on them.

On January 12, 2012, I attended the progam "Gift Acceptance Policies: Why, When, What, How, and Who" presented to the Northern California Planned Giving Council by exempt organizations attorney Barbara Rhomberg. Using the example of the Trojan Horse, Barbara quickly convinced us that not all gifts are good ones and the time for a gift acceptance policy is before a charity accepts a problematic gift. Here are some highlights of her talk [and some of my thoughts in bracketed text].

There are 5 factors a charity must consider before accepting a noncash gift:

Costs of ownership.

Costs associated with the sale.

Staff/volunteer time required.

Exposure to liability [and other harm].

Marketability of the gifted asset and any cash flow associated with it.

In addition, a charity must assess the impact of any restrictions on the use or disposition of the asset (e.g., prohibitions against a sale, endowment-related issues); any strings and conditions (e.g., naming opportunities, payment of associated legal or appraisal costs); embarassing gifts (e.g., due to nature of donor's business); and tax shelters.

Gifts of real estate may be of great value to a charity. But there may also be significant costs of ownership (e.g., maintenance, insurance, property taxes) and sale. Additionally, there may be risks of environmental liability (particularly with undeveloped land or land with prior commercial use), title problems, prior mortgages/liens, and marketability. [For fiscal sponsors, there must be consideration of what the sponsoring organization will do with real estate secured for a project if the project committee fails to raise sufficient funds and/or disbands.]

A gift acceptance policy will help protect a charity from accepting a bad gift, expedite the acceptance of a good gift, facilitate the tactful decline of a gift, and evidence an appropriate level of governance [which will be reflected on its Form 990]. A good policy will answer the following questions among others:

What assets can be accepted?

Who will review the assets and how will they be reviewed?

How will restrictions, strings, and conditions be evaluated?

Who can accept the asset?

While charities will not want to be bound by rigid rules that fail to consider special circumstances that might make an exception in order, a good policy will identify who is authorized to make such exceptions (e.g., executive director, board committee, or board). A good policy will also take into account the charity's unique set of facts and circumstances. And a charity will benefit from the experience of working through development of its own gift acceptance policy that considers its own unique set of facts and circumstances. Simply copying a template document may be do more harm than good though review of a few strong templates may be a great place to start.